Position-sizing for traders with stop movement strategies

Question for the traders who use stop movement as part of your trade management techniques: do you set your position size using the theoretical maximum risk of the trade or do you set it using the realized risk on historical trades?

To make it more clear, in case it isn't, let's say that you want to risk 1% per trade and if you look at your losing trades you've been able to historically reduce your risk by 50% on each losing trades via your stop movement techniques, so that you would actually put 2% at-risk in order to lose, on average, 1% at trade closure, would that be what you did or would you look at risking 1% from the start and lose 0.5% on average? In the first scenario, sometimes you will lose 2%, obviously, but if your strategy is net profitable, it should be more profitable using the 2% to lose 1% trade size than the 1% to lose 0.5% trade size.

Interesting that you should ask this as I have this EXACT issue with my system. I used to routinely risk 0.75% and have based on my stats on average a 0.56R loss when I lose. This is because of the stop management of tightening my stops quickly if the trade does not work out almost immediately. I have looked at my trades and have increased my risk per trade to 1% now. I COULD increase to as high as 2% as you say. However to blindly assume 2% is going to lead to the same results is probably a bit cavalier for the follwoing reasons:

1) you probably have yet to see your biggest loss on any trade. I have never had a los >1.1R but I am using assumptions that 5R will be my max R loss on a trade where some weird catastrophe wrecks a trade and it opens gap lower past my stop. This is likely a rare event but I assume this for protection of my equity.

2) you MUST correlate your risk per trade with your win rate. (YES I know that win rate does not need to be high for a profitable system). Win rate does not have a huge effect of profitabilty as it effects DRAW DOWN and RISK OF RUIN. The higher the win rate the less your risk of draw down.

So, I have assumed a worse than average maximum loss for any one trade (5R) and I have also run a Monte Carlo Simulation on my trade data to get to see what the effect of higher risk per trade would be on my draw down. This way I know what my max draw down SHOULD BE with whatever level of risk I plug into the data set for the MC Sim. Just play around with different % risk and see MAX Draw Down you could expect with these levels of risk . Realize that there are assumptions with any MC Sim. The assumption is that your system will perform the same in the future as it has in the past when you collected your data. It also assumes you wil trade your system the same even when the market changes. These are big assumptions but the best we can do. That is why i think it is wise to assume MORE than a worse case scenario based on your data....but start with MC Sim of your data.

Question for the traders who use stop movement as part of your trade management techniques: do you set your position size using the theoretical maximum risk of the trade or do you set it using the realized risk on historical trades?

To make it more clear, in case it isn't, let's say that you want to risk 1% per trade and if you look at your losing trades you've been able to historically reduce your risk by 50% on each losing trades via your stop movement techniques, so that you would actually put 2% at-risk in order to lose, on average, 1% at trade closure, would that be what you did or would you look at risking 1% from the start and lose 0.5% on average? In the first scenario, sometimes you will lose 2%, obviously, but if your strategy is net profitable, it should be more profitable using the 2% to lose 1% trade size than the 1% to lose 0.5% trade size.

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both, of course.

Stop must be there were the pattern is broken.

But the odds are changing with every new tick and therefore your Trailingstop must move too, doesnt matter if it is a hard stop or a mental.

No 1 rule = Never let a winner turn into a loser.
The difficult thing here is to know, WHEN to take out the risk of the trade, with still having the best odds for you to win the trade.... Not to early and not to late.......
you must find the average solution, but still have worst case emergency scenarios rules, the get out of the position immediately, when the odds changing too bad.
Sometimes you are wrong, sometimes not. Only important is that you only lose so small and few how it is possible, then the profits will come from alone.

No 1 rule = Never let a winner turn into a loser.
The difficult thing here is to know, WHEN to take out the risk of the trade, with still having the best odds for you to win the trade.... Not to early and not to late.......
you must find the average solution, but still have worst case emergency
.

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Not difficult at all. Set a definitive target. Book 1/3rd of your profits halfway to your target. Move your stop up halfway. You've just reduced your risk by 83%. Sell another 1/3 at your target. Move your stop to breakeven. Let the remainder ride using a technical stop or close below an 8 ema/cross of 13 ema on a 5min time frame (just some examples here).

Gives u best of both worlds... manage risk as well as benefit by continued price improvement in your desired direction.

I actually disagree with you a little bit here. So long as you are following your regular stop movement discipline, losing the profits from a favorable excursion as price moves back toward and through your entry and then hits your stop is not a bad thing. The alternative is to jump out of the trade once it hits your entry again, but if your stop movement hasn't yet gotten your stop past your entry, your stop is still not hit, so shouldn't trigger an exit.

Granted, when you look at it with hindsight, you get a little perturbed that you lost a paper profit, but if you've done your homework on stop movement, over time that disciplined approach should yield higher profits.

Not difficult at all. Set a definitive target. Book 1/3rd of your profits halfway to your target. Move your stop up halfway. You've just reduced your risk by 83%. Sell another 1/3 at your target. Move your stop to breakeven. Let the remainder ride using a technical stop or close below an 8 ema/cross of 13 ema on a 5min time frame (just some examples here).

Gives u best of both worlds... manage risk as well as benefit by continued price improvement in your desired direction.

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+1

riskmanagment is done with profit taking parts managment.

Yes, to mix up different strategies is the best answer how to have the risk small and the odds for win still good.

Average riskmanagment sucks anyways.
Advanced risk/trade managment is so much cooler and much much profitabler. LOL.

I actually disagree with you a little bit here. So long as you are following your regular stop movement discipline, losing the profits from a favorable excursion as price moves back toward and through your entry and then hits your stop is not a bad thing. The alternative is to jump out of the trade once it hits your entry again, but if your stop movement hasn't yet gotten your stop past your entry, your stop is still not hit, so shouldn't trigger an exit.

Granted, when you look at it with hindsight, you get a little perturbed that you lost a paper profit, but if you've done your homework on stop movement, over time that disciplined approach should yield higher profits.

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yes.

this all depends on your own trading style.

For me i must say, when its time to put my stop to around breakeven to have no risk anymore, i am still on guard to take out profits all or a part, if the odds change.
Only in the worst case i will get stoped out, and have no profits at all. but the most scenario of the bad scenarios is that i have takin the 1/2 profit, when odds change, and got stopped out with the other half. So my risk/reward on this trade is around 1 : 0,5 most of the time.

For my style, its very very very important to take out the risk if the price does not move how expected right after i am in the trade, otherwhise i will lose.

I am a market timer, not a trend follower !!!
Picking and timing cycles is my bread and butter....